We have been noting for the past few months that the Intermountain issue would be heading to the Supreme Court soon, with the government’s petition in the Home Concrete case due on July 5. The taxpayers in Beard have jumped the line, however, by seeking certiorari ahead of the deadline, and that case is now docketed in the Supreme Court as No. 10-1553. Meanwhile, the government has obtained a 30-day extension until August 3 to file its certiorari petition in Home Concrete. Thus, unless the taxpayer in either Salman Ranch, Grapevine, or one of the D.C. Circuit cases sprints to the Court with its own cert petition well before the deadline, it looks like Beard will be at the head of the line by a good margin.

The petition does not add much to the arguments on the merits of the dispute. The goal of a certiorari petition is to explain to the Court why it is important for it to hear the case. If cert is granted, there is plenty of opportunity for the litigant to address the merits. One of the best ways to convince the Court that it has to step in to a dispute is to demonstrate a conflict among the various courts of appeals, which will lead to different outcomes in similar cases unless the Court steps in. Making that showing on the Intermountain issues is like shooting fish in a barrel. The Beard petition sensibly focuses on discussing the circuit conflicts, both on the statutory interpretation issue (where the Seventh Circuit in Beard is the only court to have ruled that, even without the regulations, the statute should be construed as providing for a six-year statute of limitations (see here)), and on the question whether Chevron deference is owed to the regulations.

There are two items worth noting in the petition that relate to the merits. The petition signals that the taxpayer will argue that Chevron is getting completely out of hand if deference is paid in the context of this case. Specifically, the petition states that the government’s position that “the Treasury is empowered to reject and overrule longstanding precedent of this Court and other courts that it disfavors, simply through the issuance of temporary regulations without notice and public comment threatens obvious, far-reaching consequences.” Second, the petition briefly responds to the argument that Colony should be read as applying only to cases involving a trade or business by pointing out that, although Colony itself did involve a trade or business, the Court was seeking there to establish a rule that would resolve a circuit conflict, and some of the conflicting cases did not involve a trade or business.

The next step is a response by the government, currently due on July 27. In most cases, of course, the government’s response to a cert petition is to oppose the petition and argue that the Court should leave standing the court of appeals decision in favor of the government. Sometimes, however, when there is a circuit conflict on an important issue, the government will “acquiesce” in the petition — meaning that it will tell the Court that the court of appeals decision was correct but that it agrees with the petition that the Supreme Court should hear the case so that it can pronounce a rule that will apply uniformly throughout the country.

The government is virtually certain to agree that the Court should resolve the Intermountain dispute. The only question would seem to be a tactical one: will the government acquiesce in the Beard petition and have the dispute resolved in that case, where the government prevailed below? Or will the government instead try to steer the Court towards a different case where perhaps it believes the facts are more favorable or where the taxpayer prevailed below. The request for an extension in Home Concrete is a pretty good indication that the government is content to let the issue be resolved in Beard.

As far as timing, the government routinely secures extensions of time to respond to certiorari petitions. (You may recall that the government got four extensions to respond to the Kawashima petition. Seehere). But if the government decides to acquiesce in Beard, that would be a very simple filing, and the government has had plenty of time already to decide what it wants to do in these cases. Thus, it is possible that the government’s response will be filed on July 27.

The government filed its response brief in Anschutz Co., et al. v. Commissioner, Nos. 11-9001 & 11-9002 (10th Cir.), on June 22, 2011 (linked below). See our prior coverage here. Not surprisingly, the government argues that the Tax Court got it right in viewing the putatively separate variable prepaid forward contracts and stock loans as two parts of one overall arrangement, designed to monetize the value of the taxpayer’s low-basis stock at the outset of the deal. The Tax Court held that, in substance, the overall arrangement was a sale for tax purposes because the benefits and burdens of owning the stock had been passed to Anschutz’s counterparty. Based on the briefing, it appears that the key question in the case will be whether the IRS and the Tax Court were correct in viewing the transactions as an integrated whole, or whether they must be analyzed separately under the technical provisions applicable to stock loans and variable prepaid forwards.

The D.C. Circuit yesterday reversed the Tax Court in Intermountain, handing the government more ammunition to use if, as appears increasingly likely, the Supreme Court considers the question of the applicability to overstatements of basis of the six-year statute of limitations found in Code sections 6229(c)(2) and 6501(e)(1)(A). This now makes the score 4-2 for the government and represents the third straight court of appeals to adopt the government’s primary argument that courts owe Chevron deference to the relatively recent Treasury regulations interpreting the six-year statutes to apply to overstatements of basis.

The D.C. Circuit’s opinion is comprehensive, tracing the same ground as the Federal Circuit’s Grapevine decision, but also supplementing that court’s analysis. In particular, the D.C. Circuit explores in detail the background of Colony and the legislative history of the 1954 Code in order to justify the conclusion that section 6501 does not unambiguously provide that overstatements of basis do not trigger the six-year statute — even though the same statutory term “omission from gross income” in the 1939 Code was construed in Colony not to include overstatements of basis. Having reached that conclusion, the D.C. Circuit found that the Chevron step two analysis was “easy,” and there was no justification for suggesting that the Treasury regulation was an unreasonable interpretation of the statute.

One item of interest is the court’s refusal to address a couple of arguments made by Intermountain’s counsel because they were not raised in a timely fashion. The court’s analysis distinguishing current law from the 1939 Code provision addressed in Colony relies heavily on the 1954 addition of section 6501(e)(1)(A)(i), which specifically addresses “gross income” in the case of a trade or business. Intermountain contended at oral argument that this analysis ought to be irrelevant in a case that involved only section 6229, not section 6501. The court, however, refused to consider that argument, stating that Intermountain had never before argued “that the two sections have different meanings outside the trade or business context.” The court also refused to consider, as raised too late, Intermountain’s reliance on positions taken by the Commissioner on the meaning of Colony before the son-of-BOSS cases arose. One might see these arguments raised and addressed in the Supreme Court down the road.

The Intermountain opinion also governs the companion UTAM case that was argued in tandem. The D.C. Circuit did issue a separate opinion in UTAM addressing an issue unique to that case — whether a final partnership administrative adjustment (FPAA) tolls an individual partner’s limitations period under section 6501 in the same way section 6229(d) tolls the section 6229(a) “minimum period.” The court ruled for the government on that issue as well, and we plan to address that opinion in another post.

Intermountain is likely the last that will be heard from the courts of appeals on the six-year statute issue before it moves to the Supreme Court. (The Federal Circuit, as expected, denied rehearing in Grapevine on June 6. Reynolds Properties v. Commissioner, No. 10-72406, has been fully briefed in the Ninth Circuit, but oral argument is not yet scheduled.) The government’s recent successes in the courts of appeals give it a lot of momentum heading to the Court. Of course, it is often said that momentum is only as good as the next day’s starting pitcher, and in the end the Supreme Court will make up its own mind without regard to the score in the courts of appeals. The government’s anticipated petition for certiorari in Home Concrete is due July 5.

The government has filed its reply brief in the Fifth Circuit in Entergy. (See our initial report on the case here.) The reply brief puts forth a somewhat less disapproving attitude towards the examination of extrinsic evidence in foreign tax credit cases than previously advanced, stating as follows: “The Commissioner does not contend (as he did below) that extrinsic evidence has no relevance in determining creditability under Treas. Reg. § 1.901-2(b). Rather, our argument is that it was improper for the Tax Court to supplant an analysis of the windfall-tax statute with an analysis of extrinsic evidence.”

The bottom line, however, is the same. The government maintains that the text of the U.K. Windfall Tax statute, by describing the tax using the term “value,” conclusively establishes that the tax is not an “income” tax in the U.S. sense and therefore is not creditable.

The case will now await an order from the Fifth Circuit setting a date for the oral argument, which is likely a few months away.

As we previously reported, the Ninth Circuit in Washington Mutual reversed the district court and ruled that the taxpayer did have basis in regulatory rights that it received in connection with a transaction in which it took over failed thrifts during the savings-and-loan crisis of the 1980s. The government has now allowed the periods for seeking rehearing and certiorari to expire without taking action. The Ninth Circuit’s decision is therefore final, and the case will move on to further proceedings on remand in the district court to determine the amount of basis.

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The Tax Appellate Blog is intended to be a resource for information on important tax cases under consideration in the appellate courts. It will feature insightful commentary on the issues and provide a dedicated site for following the progress of these cases.

Authors

Steve Dixon is a member in the Tax Department at Miller & Chevalier. He specializes in controversy and litigation, representing taxpayers in the Tax Court and Federal courts.

Laura Ferguson is a member of the Supreme Court and Appellate Litigation Group at Miller & Chevalier and has successfully briefed and argued six cases at the U.S. Courts of Appeals in the past two years. Ms. Ferguson also has extensive experience litigating complex, high-stakes tax cases at the Tax Court and federal district courts.

Alan Horowitz is the former Tax Assistant to the Solicitor General at the Department of Justice, where he briefed and argued numerous tax cases in the Supreme Court. He is currently the head of the Supreme Court and Appellate Litigation Group at Miller & Chevalier.